Cheat Sheet

Management and Cost Accounting For Dummies (UK Edition)

Management and cost accounting helps managers and other decision-makers understand how much their products cost, how their companies make money, and how to plan for profits and growth. To use this information, company decision-makers must understand management and cost accounting terms. When planning for the future, they follow a master budgeting process. To prepare this budget, and to understand how costs behave, the decision-makers should understand cost-volume-profit relationships, which explain how changes in volume or price affect profits.

Key Costs Related to Management and Cost Accounting

In accounting, a cost measures how much you pay for something. Management and cost accounting must give managers accurate cost information relevant to their management decisions. Here are several cost-related terms you encounter in management accounting:

Direct cost: Cost that you can trace to a specific product.

Indirect cost: Cost that you can’t easily trace to a specific product.

Materials: Physical things you need to make products.

Labour: Work needed to make products.

Production Overhead: Indirect materials, indirect labour and other miscellaneous costs needed to make products.

Cost of goods manufactured: The cost of the goods completed during a period.

Cost of goods sold: The cost of making goods that you sold.

Controllable costs: Costs that you can change.

Non-controllable costs: Costs that you can’t change.

Conversion costs: Direct labour and overhead.

Incremental costs: Costs that change depending on which alternative you choose; also known as relevant costs and marginal costs.

Irrelevant costs: Costs that don’t change depending on which alternative you choose.

Opportunity costs: Costs of income lost because you chose a different alternative.

Sunk costs: Costs you’ve already paid or committed to paying.

Historical cost: How much you originally paid for something.

Cost per unit: Cost of a single unit of product.

Expense: Costs deducted from revenues on the income statement.

Cost driver: Factor thought to affect particular costs.

Process cost: Cost of similar goods made in large quantities on an assembly line.

Job order cost: Cost of a batch of specially made goods.

Absorption cost: Cost that includes direct and a share of production overheads.

Target cost: Cost goal set for engineers designing a product.

Elements that Go Into Creating a Master Budget

A master budget is a plan created to manage a company’s manufacturing and sales activity to meet profit and cash flow goals. Creating a master budget requires careful coordination of several smaller budgets covering all parts of the organisation; that way, the master budget is realistic but not complacent.